Slipping Away

Bond yields have eroded further in recent weeks, with Australia’s 10-year government bond yield dipping below 2%, Germany’s briefly turning negative for the first time, while the yield on the US 10-year note threatens to revisit its lows of 2012.

 

It appears yields in fixed-income markets are rapidly evaporating. Globally, around 30% of government bonds now trade with negative yields, compared to zero just two years ago. But compared with global markets, Australia still looks relatively attractive on yield opportunities.

In the fixed income arena, Australia has the highest interest rates of any country with a AAA rating, providing positive real returns without taking significant risk. In equities, we continue to see appeal in yield based-strategies.

 

The perseverance of low rates today and the shape of the yield curve are as much a result of unprecedented central bank intervention, as it is a sign of growing investor bearishness.

 

For various reasons, we don’t expect this landscape to change much. However, central banks and fixed income investors are living on the edge, given the diminished effectiveness of increasingly negative rates and the unintended consequences they create.

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